Fed Views Latest Labor Data As Strong Improvement

The Fed has decided not to change its monetary policy. Improved labour market conditions were highlighted in the statement and press briefing from Chairman Ben Bernanke. Even if it is just about wording, Chairman Bernanke confirmed that the Fed views latest data as strong improvement. FOMC members are very satisfied with the current improvement in the labour market, but they want to guarantee this is not temporary. Before the June meeting, they might pre-announce a slowdown in QE3.

As widely expected, the Fed did not change its monetary policy. The third wave of quantitative easing will keep on being implemented at the exact same pace of USD 40 bn of monthly MBS purchases, and USD 45 bn of long-dated Treasuries. The Fed Fund Target remains in the 0-0.25% range, and will be kept there as long as the unemployment rate does not break the 6.5%-threshold, unless prospects are for inflation to accelerate above 2.5% within a 1 to 2 year horizon.

Today, updated forecasts were issued by FOMC members (voting and non-voting) for GDP growth, the unemployment rate, the pace of increase in the PCE deflator (headline and core) as well as the likely timing of policy firming and the likely level of the Fed Fund Target over the next two years. Revisions have been marginal since December 2012. To balance it out, Fed members seem slightly less optimistic about GDP growth but slightly more confident about the pace of decrease in the unemployment rate. As for inflation, they largely forecast that the 2%-target will be missed this year, next year and the year after that.

Only one or two members expect PCE inflation to be higher than 2.5% in 2015 (at 2.6%), leaving large rooms for the Fed in which to manoeuvre. The focus will remain on the labour market.

From that statement, it is possible to have a clearer idea of what the Fed sees as satisfactory. The current average of monthly increases in non-farm payrolls, at around 200,000, together with the unemployment being on a sustained (even if mild) downward path, and initial claims at multi-year lows are satisfactory to the Fed.

Even if Bernanke remained vague as to what would lead the Fed to taper of monthly security purchases, we think that if the labour market were to be this strong over the next few months, the Fed could pre-announce the move before the June meeting.

BY Alexandra ESTIOT

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